Where (and Why) Economics Went Wrong
“There’s something wrong with the way economists do economics,” says Robert Skidelsky “If I’m right, that’s dangerous, because economists are so influential.”
Over the years, a chorus of criticism has emerged against economics. In 2019, David Colander and Craig Freedman released Where Economics Went Wrong. In it, they argued that economics went wrong when it threw out the firewall between scientific theory and policy making. In 2020, Robert Skidelsky published What’s Wrong With Economics?, which explored Econ’s quixotic quest for scientific certainty.
Most recently, Tyler Cowen wrote a Bloomberg article arguing that economics is—in some critical ways—failing us.
Contrary to what the opinion pages might say, economic “solutions” aren’t always clear cut. Rather optimistically, Milton Friedman once predicted that scientific advances would solve our economic squabbles. While that prediction clearly hasn’t come true, what’s intriguing is the argument that it never will. In Where Economics Went Wrong, the authors explain how economics is more subjective than objective—and therefore many economic arguments can’t be “settled” by science alone. Of course, unlike today’s know-it-alls, previous generations of economists acknowledged these limits.
The authors of Where Economics Went Wrong also argue that economics must overcome its narrow-minded pursuit of mathematical modeling—and embrace, among other things, an interdisciplinary perspective.
Overall, economics should, in their view, be more artful and self-aware (qualitative) and less certain and theoretical (quantitative).
Similarly, Skidelsky takes aim at methodology—or “how” economics is done. While this may seem boring, it pinpoints what’s wrong. The failure of economics as a predictive science, or as a practical guide to reality, isn’t the fault of individual economists. It’s a systemic problem. As Skidelsky says, “The cardinal fault of economics lies not in specific doctrines, but in the methods it uses to reach its conclusions.”
As an academic subject, an overemphasis on mathematical modeling and theoretical abstraction—often at the expense of actual understanding—leaves many students overconfident and/or unprepared for the real world. After all, what’s the point of economics if it can’t give us useful predictions or policy prescriptions?
Speaking of academic criticism, Where Economics Went Wrong offers plenty. It highlights Ariel Rubinstein, a theoretical economist and game theory expert, who demolishes the scientific pretensions of economics: “I intentionally use the word ‘academic’ since I do not think that the word ‘scientific’ is appropriate for economics.”
Not content to criticize economics generally, Rubinstein hones in on his area of expertise—game theory. “A model is a fable,” he says. “Game theory is about a collection of fables.” He continues:
A main difference between game theory and literature is that game theory is written in formal, mathematical language…The disadvantage of formal language is the level of abstraction, which has two main downsides. First of all, it makes the theory very [hard to grasp]…most people who claim to use game theory hardly understand it. Secondly, abstraction has the negative side that once you abstract things, you miss a lot of the information and most of the details, which in real life are very relevant.”
Of course, no criticism of economics is complete without mention of Paul Romer, a Nobel Prize winner who wrote “The Trouble with Macro” in 2017. In that essay, Romer argues that macroeconomics has “gone backwards” for more than three decades, and he blames the leading figures within the profession for group think and ignoring common sense.
For instance, the economics profession is overly obsessed with rigor, and that comes at the expense of originality. As Tyler Cowen observes, “The economists who have changed the world, such as Adam Smith, John Maynard Keynes or Friedrich Hayek, typically had brilliant ideas with highly imperfect execution. It is now harder for this kind of originality to gain traction.”
In a clever twist, Cowen deploys the Laffer Curve: “To use a bit of economic terminology, economists haven’t fully internalized the lessons of the Laffer Curve. By demanding so much rigor in academic research, they’ve created an environment in which most of the economics people actually see is less rigorous.” In other words, the tax on original thinking is too high, so we’re getting less of it.
Troublingly, economic thinking isn’t just less original. It’s more dogmatic. First, the sociology of the economics profession reinforces prevailing beliefs (group think). Second, economics has become both more ideological and less forthcoming about its bias. According to Tyler Cowen, this has “led to less intellectual diversity and fewer radical new ideas. That, in a nutshell, is the main problem with the economics profession.”
To be fair, many of these criticisms are not new. As Allison Schrager said recently, "No economist needs to be told that we use too much math, that people aren’t simple rational creatures, or that motivation involves more than incentives. We hear these protests at least once a day from the legions of armchair econo-critics.”
Perhaps economists are well aware of these problems. But why aren't they doing anything about it? Now that would be a worthy case study of "irrationality".